Administrators – adoption of contracts and the Job Retention Scheme

In two recent cases the High Court has considered the adoption of contracts by administrators in the context of applications under the Coronavirus Job Retention Scheme (CJRS).

When an administrator is appointed to a company it is necessary to consider whether the administrator has adopted the contracts of employment under the Insolvency Act 1986 (IA 1986). Under that act, nothing done within the first 14 days will amount to adoption. However, outside of that 14 day breathing space, case law has held that an administrator will generally be considered to have adopted the contracts of employment if they continue to employ staff and pay them in accordance with the contracts. If the contracts are adopted then under Paragraph 99(5) Schedule B1 IA 1986 liabilities in respect of wages and salary under those contracts, (which includes holiday pay and pension contributions) will have super priority over other types of claims.

The CJRS is the Government funded scheme where employers can claim a grant from HMRC to cover 80% of the wages of employees who have been furloughed (not working) up to £2,500 per month. Administrators are able to access the CJRS, but the guidance states that administrators should only access the scheme if there is a “reasonable likelihood of rehiring the workers”. In both these cases the administrators of both Carluccio’s and Debenhams were seeking confirmation on whether placing employees on furlough under the CJRS resulted in the employees contracts of employment being adopted under the IA 1986.

In the Carluccios case the restaurant chain went into administration on 30 March. In order to avoid making redundancies and to help in rescuing the business as a going concern, the administrators sought to retain the staff by placing them on furlough under the CJRS. The administrators sent letters to the employees varying their contracts of employment to confirm that the employees would be paid at the rates of the CJRS and that they would only be paid if the administrator received a grant from HMRC under that scheme. The majority of employees accepted the variation to the terms of their contracts, some preferred to be made redundant and some employees had not responded by the requested date. The administrators sought confirmation from the court on how the administrators should place the employees on furlough and also whether the administrators could avoid incurring liability if they adopted the contracts of the employees who had not responded to the variation letter outside the 14 day period.

The court held that the contracts of employment of those who had consented to be furloughed had been validly amended and that the employees were therefore entitled to wages on the level of grants to be paid to the company under the CJRS. The contracts of employment would be adopted by the administrator when an application was made under the CJRS or the payments were made to the employees under that varied contract. However, the contracts of those employees who had not responded had not been varied. There was no possibility in these circumstances for there to be implied consent to the variation. These contracts would not be considered to have been adopted merely through the failure to terminate the contracts of employment and would only be adopted once a claim was made under the CJRS or a payment was made to the employees.

The second case involved administrators appointed with regard to Debenhams. In this case the employer had placed the employees on furlough prior to the appointment of the administrator. Following their appointment, the administrator wrote to employees seeking their consent to the furlough arrangement and the reduction in salary. The administrators sought further confirmation from the court in relation to the issue of adoption. They were concerned that if the administrators were considered to have adopted the contracts then their fees and costs would be subordinated to payments due to the employees including the difference between the employees’ usual salary and the grant under the CJRS and the amount of any SSP or holiday pay that may be due to an employee which would not be covered by the CJRS.

The court held that continued participation in the CJRS after the 14 day period, including application to HMRC and making the payment to the furloughed employee of the amount paid by the grant, would be considered engaging in positive conduct and therefore the administrators would be adopting the contracts. Therefore, unless that contracts were terminated or varied before the 14 days expired the administrators could be liable for the full amounts due under the contract. The administrators had sought to argue that the fact that services were not actually being provided by the employees should be taken into account. They also argued that the purposes of the CJRS would be undermined if the contracts were to be adopted. However, the court held that the absence of services being provided does not of itself lead to a reason why the contracts should not be considered adopted.

In both cases a significant number of employees had given consent to the variations in the contract and therefore although the contracts had been adopted the liability for the administrators is simply in relation to the amount being claimed under the CJRS. However, for those employees who have not consented to any such variation, it is likely that administrators would have to make those employees redundant to avoid incurring additional non-recoverable costs, which would then have super-priority. However, it should be noted that these decisions are both first instance decisions without the benefit of full argument, where the administrators required quick guidance in order to proceed under the new scheme put in place.

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